HW3_Answerkey

HW3_Answerkey - Homework 3 Answer Key 1) Tom and Wendy have...

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Homework 3 – Answer Key 1) Tom and Wendy have left the farming business. Each bought a clothing factory and they now produce ties and shirts. Wendy's PPF is represented by Shirts = 100-1/3Ties. Tom's PPF is represented by Shirts = 80-1/2Ties. Wendy started business by producing 180 Ties and 40 Shirts per hour, while Tom produced 90 Ties and 35 Shirts per hour. Later, they met and decided that each would fully specialize according to comparative advantages and then trade 100 ties for 42 shirts. What are the gains from trade for Tom? a) 10 ties, 2 shirts; b) 10 ties, 3 shirts; c) 10 ties, 7 shirts; d) 20 ties, 2 shirts; e) 20 ties, 3 shirts; Answer: b) We need to identify who has the comparative advantage in which good. To do so, we must compute the opportunity costs of producing ties and shirts for each agent. The slope of the PPF will allow us to do that. Start with Wendy. PPF: Shirts = 100-1/3Ties. If we increase the production of ties by 1 unit, we will have to decrease the production of shirts by a third of a unit. By re-arranging terms, we can rewrite the PPF as Ties = 300-3Shirts. If we increase the production of Shirts by 1 unit, we have to decrease the production of ties by 3 units. Hence, Wendy’s opportunity cost of producing ties = 1/3 shirt Wendy’s opportunity cost of producing shirts = 3 ties If we repeat the same steps for Tom, we find that:
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This note was uploaded on 03/24/2009 for the course ECON 101 taught by Professor Balaban during the Spring '07 term at UNC.

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HW3_Answerkey - Homework 3 Answer Key 1) Tom and Wendy have...

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